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Brexit: potential impacts for local economies

posted on 26th March 2017

‘Hard Brexit’ could leave local economies struggling

Manufacturing and low-income localities in North and Midlands particularly vulnerable

A ‘hard Brexit’ without special arrangements to support jobs and industries will hit Britain’s manufacturing centres and poorest localities hardest, research published today by economic experts My Local Economy reveals (The full report is available here).
While attention has focused on how Brexit will affect the high-flying financial industries of London, negative impacts may be felt all over Britain. My Local Economy’s research ranks council areas across Britain in terms of economic vulnerability to Brexit, with some surprising findings.
Areas that may feel the pinch include specialist employment centres such as Tewkesbury and Stratford-on-Avon, areas that are highly dependent on EU labour including Watford and Moray, and low income communities where people will be hit hardest by price inflation, including Blackpool and West Somerset.
Dr Glenn Athey, author of the research and director of My Local Economy, said: ‘We have had to assume there will be a “hard Brexit” without alternative free trade deals to replace current EU arrangements because there is no evidence of plans to prevent it.
‘Local business and political leaders need to act now to assess the risks to their localities and support important local industries. Understanding the risks posed by Brexit and how best to prevent them is essential if we are to protect jobs and incomes.’
The research, Brexit: Potential impacts for local economies, creates an index of vulnerability based on official statistical data. The index is visualised in a series of maps created by Mapden.com. It shows that any economic restructuring following Brexit is likely to be uneven, with losers as well as gainers spread across the country.
Those most at risk are manufacturing centres like Sunderland that depend on global supply chains, centres of labour-intensive industries such as agriculture and tourism that depend on EU migrant workers, and low-income communities that will be vulnerable to rising inflation resulting from tariff barriers and the depreciation of sterling against other currencies.
The report provides advice and recommendations on how localities can plan ahead to avoid the worst potential impacts of Brexit by investing in market intelligence and skills, and by continuing to welcome overseas investment and labour.
The full report is available here. A more detailed summary is discussed below.

Key findings from My Local Economy research

Manufacturing and low-income areas in the Midlands and North of England are most vulnerable to a ‘hard Brexit’ with no alternative free trade agreements in place

Specialist industries such as transport services may suffer because they are enmeshed in complex global supply chains that are highly integrated with EU countries. Labour-intensive industries that depend heavily on migrant workers could struggle to recruit staff. And low-income areas are likely to be hit hardest by any devaluation of sterling against other currencies and consequent increases in inflation.
This information has been compiled in an index of vulnerability based on official statistical data. The index is visualised in a series of maps created by Mapden. It shows that any economic restructuring following Brexit is likely to be uneven, with losers as well as gainers spread across the country.
The report reveals that hopes of economic gains through the reduction of red tape and regulation are unrealistic as the UK is already one of the least regulated economies in the OECD. To participate in future trade deals, UK companies will need to meet the regulatory obligations of the markets they hope to trade in, as well as honouring contractual commitments and legal obligations.
The report provides advice and recommendations on how localities can plan ahead to avoid the worst potential impacts of Brexit by investing in market intelligence and skills, and by continuing to welcome overseas investment and labour.
The tables of the most vulnerable areas are over the page:

Most vulnerable areas overall

1

Fylde

Chemicals, automotive and transport, dependency on EU labour

2

Barrow-in-Furness

Automotive and transport

3

Flintshire

Chemicals, automotive and transport, dependency on EU labour

4

Ribble Valley

Chemicals, automotive and transport, dependency on EU labour

5

Craven

Pharmaceuticals, dependency on EU labour

6

Tower Hamlets

Financial services

7

City of London

Financial services

8

Stratford-on-Avon

Automotive and transport

9

Knowsley

Chemicals, automotive and transport

10

Pendle

Chemicals, automotive and transport, dependency on EU labour

The overall index combined a measure of industry specialisation, industries that are more reliant on EU labour, and measures of low income relative to the national average.

Vulnerability due to reliance on at-risk industries

The EU is a major source of imports and exports for the UK. In 2013, the UK comprised one-sixth of the total value of the European Union’s economic output. Ten per cent of EU exports go to the UK, while 50% of UK exports go to the EU.
UK companies sit at the upper end of global supply chains, compared to companies in other European countries. UK specialisations are particularly concentrated in a small number of sectors, including chemicals, automotive industries, pharmaceuticals and financial services.
This means that 50% of UK exports could potentially have to adhere to a new tariff regime. So would current EU imports into the UK. The scale of change involved, including the establishment of new price/market dynamics, will have potentially huge ramifications for export competitiveness, supply chains and consumer prices. It is not possible to quantify the likely impacts of this disruption in advance of Brexit negotiations but the risks are real.

Most vulnerable areas because of industrial specialisms at risk if hard Brexit

1

Preston

2

North Somerset

3

Chesterfield

4

Blaby

5

Welwyn Hatfield

6

Bracknell Forest

7

Suffolk Coastal

8

Camden

9

Taunton Deane

10

Three Rivers

Vulnerability due to low incomes and inflation

The local areas with the lowest lower quartile earnings are listed below. These are vulnerable to price inflation and real income loss.

Most vulnerable areas because of low incomes and inflation

1

Blackpool

2

West Somerset

3

Lincoln

4

Eden

5

Hyndburn

6

Rossendale

7

Thanet

8

Torridge

9

Mansfield

10

Kingston upon Hull, City of

The overall index of vulnerability is mapped here:

Key issues for local economies, local authorities and business leaders to consider in the run-up to Brexit

1 BE FULLY BRIEFED ABOUT KEY EMPLOYERS’ INTENTIONS AND CHALLENGES

It is essential to maintain good relationships with key employers. Local leaders need to understand the risks and issues facing employers. Where firms are still planning to invest and expand, they need early support and engagement from local authorities, LEPs and business support agencies.
Where industries are at risk, local leaders can learn from previous rapid responses to industrial restructuring and closures, where skills and activities have been retained locally. It is important to preserve assets and premises that are no longer used, as they can be repurposed.

New immigration arrangements may hit local businesses and public services, reducing their ability to hire skilled staff and respond to opportunities.
To provide higher-skilled workers from the domestic labour supply, there will need to be significant improvements in the UK (and local) education and skills systems. We consider that UK governments, particularly in England, have largely failed to do this for the past 20 years. We favour more local control of education and skills provision to encourage experimentation and closer links with employers.

3 BRITAIN CURRENTLY ATTRACTS RECORD LEVELS OF FOREIGN DIRECT INVESTMENT. LOCAL ECONOMIES MUST KEEP A GLOBAL OUTLOOK AND DEMONSTRATE OPENNESS

To secure investment from overseas Britain will need to demonstrate a global outlook, openness and a welcoming attitude to different cultures. To compete globally and attract international investment we need to ensure our local communities are welcoming and cater for international and immigrant communities. No foreign-owned company will want to invest in a community where immigrants or workers from other countries and cultures are made to feel unwelcome.

4 WHILE FINANCIAL SERVICES WILL STILL BE IMPORTANT, THE INDUSTRY WILL CHANGE

While the expert consensus is that many global financial services functions will stay in the UK, those that need to be in the EU will be lost. London and the UK’s preeminent role in international financial services will continue, but we cannot be complacent. Global connectivity and creating a good climate for international business will still be essential.

5 RED TAPE IS UNLIKELY TO REDUCE AFTER BREXIT

It is unclear whether there are substantial benefits from Brexit in terms of reducing bureaucracy and regulation. The UK already has one of the OECD’s least regulated product and labour markets.
The paradox for the UK after Brexit is that exiting the EU and entering new bilateral trade deals may well increase the level of regulatory compliance for export-led UK companies because they must comply with the regulations of destination markets.

6 BREXIT MAY CURTAIL GROWTH AND TAX REVENUES

The risk is that short-to-medium term uncertainty, and the prospect of a ‘hard Brexit’ will limit GVA (gross value added) growth. If this happens, it will have knock-on impacts for UK tax revenues.
Financial services are a particular risk, as they contribute an estimated 11% of tax revenues in the UK from 1.1 million workers. There are two implications for local economies: the need to replace lost tax revenues with new sources (such as business rates, changes to income tax bands, or other taxes and charges); and the continued pressures on public finances, which are unlikely to ease over the next five years.
Local areas can build new revenue streams if they can get more houses built and support new business activities. But it will be difficult for local authorities to achieve this without the resources to provide infrastructure and other public services ahead of new developments.
Local authorities will now have to consider a full range of additional revenue raising vehicles, such as land value taxes, congestion charges, and bond finance. Their best hope is to be able to develop local finance vehicles rapidly, with less resistance from national government and HM Treasury.

Households on low incomes and welfare benefits are likely to be especially hard hit by rising inflation and the increased cost of basic goods and services.
This can be alleviated with local initiatives to help workless people back into work, and by providing help with childcare or other social care so both adults in a household can work. There is a good 30 years of experience of such initiatives that can inform local responses. Another option is to focus on in-work training and development to help people increase their earnings.

Probably the most significant reflection from past experience is that businesses tend to act swiftly to plan, restructure and operate once they have a degree of certainty about the future market, economic, or regulatory situation. This is likely to happen once the UK’s negotiating position becomes clear and will be reinforced as the post-Brexit situation develops.
Consumers can also react quite quickly in terms of adjusting or switching spending. There is unlikely to be a gradual shift. We could witness some very significant announcements and events in terms of large scale industry and business restructuring, job losses, offshoring, or new jobs growth. In uncertain times, localities must focus on their inherent strengths, assets and capabilities, ensuring that these are well prepared for the post-Brexit world.
Localities must also be prepared to respond rapidly to company announcements and changes or opportunities, often at a few days’ notice. It is important that they retain the capacity to do so.

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